Typical homeowners insurance cost

Most
home buyers wait until mortgage approval before obtaining an insurance
policy for their new home. But this can be a mistake because the cost of homeowner’s insurance is based on the replacement
cost of the home, not the purchase price. Newer homes
cost less than older homes with historic or architectural distinction
because the replacement cost of the newer home is easily determined.
Old unique homes require more specialized reconstruction. Location is
another consideration in the cost of the home. Areas that are serviced
by a full time fire department will reduce the insurance cost. Areas
that are serviced by a part time, volunteer fire department poses more
risk to the insurance company. Fire hydrants can drastically reduce
the homeowner’s premium. Recently, insurance companies are penalizing
homebuyers for claims by the previous owner. That doesn’t seem fair,
but it’s occurring. Few home buyers ask the seller what their homeowner’s
insurance cost them.

TIP
If you are in the early stages of buying a home, always ask the seller
the cost of their homeowner’s insurance premium before making an offer
to purchase.

Lenders guess at the likely homeowner’s insurance premium at
pre-approval and at application. Lenders
cannot accurately predict the cost of the homeowner’s insurance for
a home. Consequently, many homebuyer have sticker shock when they price
out an insurance policy after approval. The cost of the homeowner’s
insurance is paid for out of the mortgage payment. For example, if the
annual policy costs $360. The monthly cost is $30. But what if the lender
estimated $360 per year and most insurance companies quoted $720? The
monthly payment will increase by $30. Another consideration is the
debt to income ratio.
If the actual cost of the insurance is higher than the original estimate
by the loan officer, the loan can be denied at the last minute due to
the increased homeowners insurance cost.

Typical Policy Coverage

The most basic homeowner's policy protects your home from fire, vandalism,
theft, lightning, and windstorms. Shrubbery, trees, and outside structures
are also included in most policies. The typical policy usually pays
for living expenses if the home is not habitable or is necessary due
to the repair of the dwelling. Additional coverage can be purchased
to protect the home against damage from frozen pipes, falling objects,
and sprinkler systems. The policy includes protection from virtually
everything except war, nuclear accident, earthquakes,
floods, usual wear
and tear, intentional loss, etc. Personal belongings are usually covered
at 50% of the replacement cost of the home. For example, if the home
is insured at $100,000, the contents of the home would be covered up
to $50,000.

Most insurance policies will provide liability coverage to protect you
against a lawsuit in case someone is hurt on your property and sues
you over it. Guests tripping on stairs, walkways, slipping on un-shoveled
snow that has turned to ice or the postal carrier getting bitten by
your dog can all result in lawsuits.

Shopping for Homeowner’s Insurance

The
standard homeowner’s policy is known as HO-3. This policy can provide
coverage for 100 percent of the replacement value of your home. It is
important that you secure replacement coverage, which is what it would
cost to rebuild the home at today's prices. If you do not know what
that cost would be, ask your insurance agent or call in an appraiser.
Condominiums are covered by an HO-6 policy and have policy protections
different than the typical protections of a single family home.

You may want to consider insuring your home for more than it is worth,
since it would probably cost you more to rebuild it in the future. If
you purchased a $200,000 home, consider insuring it for $250,000. Ask
the insurance agent the premium difference, and remember, the personal
property coverage increases when the coverage increases.

Do you have expensive jewelry, baseball cards or other expensive possessions?
Unique and irreplaceable possessions may not be covered by the standard
policy. A policy rider may be necessary to specifically insure valuables.

Replacement Cost

Ask the insurance agent if the policy contains guaranteed replacement-cost
coverage. Most homebuyers rarely think about checking the coverage of
the insurance policy and tend to remain with the company that first
sold them their first homeowner’s policy. After a few years, the home
will increase in value along with the replacement cost. If the policy
does not have a “guaranteed replacement-cost” provision, the originally
policy may not cover total restoration of the home.

The calculators and information contained herein are made available to
you as a self-help tool for illustrative use only. Examples are hypothetical.
We can not and do not guarantee the applicability or accuracy in regards
to your individual circumstances. I encourage you to seek personalized advice
from qualified professionals.